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Coke Still on Track; Shares Fully Valued

First-quarter revenue growth for the wide-moat beverage maker trailed our full-year estimates, but we expect growth to increase later in the year, writes Morningstar's Adam Fleck.

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Wide-moat

We’re encouraged by the firm’s North American performance, where continued solid noncarbonated beverage volume performance (up 5%) more than offset flat soda volumes, while pricing added an additional three points of growth. This price performance outpaced PepsiCo’s 1% quarterly result, though we attribute some of this outperformance to timing and mix differences at Pepsi. Over the longer term, we expect both Pepsi and Coke to remain committed to rational pricing in the U.S. market, leading to 2%-3% price and mix contribution at each company.

With this strong North American performance, the segment’s profitability (excluding consolidating revenue eliminations) ticked up about 70 basis points, helping to drive total company adjusted operating margins to 23.8%, up from 23.4% a year ago. We expect further productivity improvements and positive pricing to support long-run margin expansion, but rising raw material costs, short-term structural issues (primarily bottling refranchising), and slowing North American still-beverage growth (owing to more difficult comparisons) will lead us to slightly lower our current 24.4% operating margin forecast for full-year 2016.

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About the Authors

Adam Fleck

Director of Research, Ratings and ESG
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Adam Fleck is director of research, ratings and ESG, for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.

Before assuming his current role, Fleck was director of equity research, ESG, where he led Morningstar's environmental, social, and governance equity research efforts, including collaboration with Sustainalytics, along with a team of analysts in Chicago and Amsterdam. Previously, he was Morningstar's regional director of equity research in Australia and New Zealand and director of North American consumer equity research. He joined Morningstar in 2006.

Fleck holds a bachelor's degree in business administration from the University of Notre Dame, where he graduated cum laude. He also holds the Chartered Financial Analyst® designation.

Debbie Wang

Senior Equity Analyst
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Debbie Wang is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. She covers the medical-device, diagnostics, and animal health industries. Previously, she was an associate director of equity analysis for Morningstar, leading the healthcare team.

Before joining Morningstar in 2002, Wang was a vice president and senior brand strategist for Leo Burnett. During her tenure at Leo Burnett, she led brand strategy on a variety of accounts, including Allstate, Amoco, McDonald's, Heinz, Smucker’s, Pepto-Bismol, and Celebrex.

Wang holds a bachelor’s degree in anthropology from Colgate University and a master’s degree in business administration from the University of Chicago Booth School of Business.

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